The risk of a further escalation in global trade tensions is elevated, especially after the breakdown of US-China negotiations in May 2019, and the subsequent hike in bilateral tariffs shortly after. Divergent strategic aims on industrial policy and technology between the US and China create significant risk the trade dispute evolves into a full-blown trade war. US trade tensions with other economies have also risen, albeit to lesser degree. Nevertheless, the risk that these tensions result in a multilateral trade conflict cannot not be ignored.
In a trade war scenario, the world economy would slow sharply, growing at the slowest rate since the global financial crisis. We explore a scenario where the US implements a range of additional tariffs on China, and its other partners. In the short-term, the impact on financial markets and global demand is severe, with world growth falling 0.1ppt and 0.9ppt below the baseline (of no further tariff hikes) in 2019 and 2020 respectively. The subsequent recovery remains sluggish even in the later stages of the scenario as productivity growth is reduced in the economies heavily impacted by increased in tariffs.
The trade war spreads across Asia through trade and financial channels. Our simulation tracks the transmission of the shock from a US-China, US-Europe and US-Global (auto sector) trade war. Firstly, through direct trade channels, and associated second-round effects on investment. And secondly, for countries which require capital from overseas to fill current account deficits and support economic growth, the trade war results in a withdrawal of capital, tightening financial conditions and undermines domestic demand in these economies.
Taiwan is amongst the hardest-hit economies in Asia in the trade war scenario. With deep integration to China's supply chain and high levels of domestic value add in its exports, Taiwan's economy feels an immediate impact from the trade war, losing 1.5% of GDP versus our baseline forecast (of no further tariff hikes or cuts) by 2020. The long-run impacts are almost twice as great. Government debt rises by around 3% of GDP into the long run, and the stock market loses more than 10% versus the baseline.
Impacts elsewhere in Asia also matter. Taiwan is not the only economy severely dented by the trade war -- South Korea feels similar (albeit very slightly lesser) GDP impacts through the 2019-2024 period, and even less-impacted economies lose 1.5-2pp over this horizon. There are permanent wealth losses through stock market falls, and a loss of around 1.3m jobs compared to the baseline across our sample of six economies.
Report is commissioned by Flat Globe Capital and written by Oxford Economics.